Small & Medium REITs to Revolutionize Real Estate Fractional Ownership
Real estate investments in India witness significant transformation with the introduction of the Small and Medium Real Estate Investment Trusts (SM REITs) framework.
Industry experts predict that this regulatory move by the Securities and Exchange Board of India (SEBI) will not only boost liquidity but also catalyze the growth of India’s real estate fractional ownership market by tenfold, reaching a staggering $5 billion by 2030.
Currently valued at approximately $500 million, India’s real estate fractional ownership market is poised for exponential growth in the next five years.
SEBI’s notification of the SM REITs framework marks a crucial milestone, allowing investors to participate in fractional ownership of rent-yielding real estate assets with a minimum investment of ?10 lakh.
Analysts project that this regulatory change will unlock immense potential for growth in the real estate fractional ownership market.
Present Situation: Real Estate Fractional Ownership Platforms (FOP)
In the last five years, several online ventures called Fractional Ownership Platforms (FOPs) have come up, allowing HNIs and retail investors to participate in such real estate investments with minimum investments ranging between Rs. 10 lakhs and Rs. 25 lakhs.
FOPs operate by pooling money from investors online to invest in luxury residences and holiday homes. An entity called special purpose vehicle (SPV) purchases and retains title to the property and the investors are issued shares in the SPV. Rental income generated by the property from time to time is then distributed by the SPV to the investors. Another variant of this strategy does away with the SPV structure and allows investors to jointly and directly own small percentages in real estate.
Fractional ownership in real estate has been gaining popularity because it:
(a) removes the traditional barriers associated with real estate investment - a requirement for high capital and risk appetite,
(b) allows retail investors to participate in the investment, earn returns and avail the benefit of rising valuations of the real estate market, and
(c) opens up a new asset class for investments, thus promoting greater diversification in investment portfolios.
Given the traction, SEBI has notified amendments to the REIT Regulations to introduce a framework for small and medium Real Estate Investment Trusts (SM REITs) on March 8, 2024.
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Whats new in SM REIT Framework
Key aspects of the regulations focus on safeguarding investor interests and ensuring the structured growth of the market. Investment managers setting up SM REITs must meet stringent criteria, including a net worth of at least ?20 crore and a minimum of two years’ experience in the real estate industry or real estate fund management. Additionally, the regulations mandate investment managers to retain a minimum stake in the REITs, ensuring alignment of interests with investors.
Furthermore, SM REITs must adhere to strict investment guidelines, with at least 95% of assets invested in completed and revenue-generating properties. This ensures transparency and stability within the investment portfolio, mitigating risks for investors.
The regulatory framework also outlines the size and scope of SM REIT schemes, with assets valued between ?50 crore and ?500 crore, and units issued to a minimum of 200 investors. This opens up opportunities for both retail and institutional investors to participate in the real estate market with relatively lower entry barriers.
The opportunity with SM REIT
Industry leaders welcome the SEBI regulations, acknowledging their potential to drive growth and enhance investor confidence in the real estate sector. Kunal Moktan, CEO of PropShare, emphasizes the benefits of regulation, including uniformity, fairness, transparency, and redressal mechanisms, which are crucial for market integrity and investor protection.
With over 328 million sq. ft of grade A office assets in India’s top seven cities deemed suitable for SM REITs, the market holds immense untapped potential. JLL, anticipates accelerated growth as regulatory frameworks align and Fractional Ownership Platforms (FOPs) overcome initial hurdles.
Colliers India, anticipates a significant boost in liquidity and investor participation, particularly in office yielding assets. Similarly, Shrinivas Rao, CEO of Vestian, foresees increased participation from domestic and foreign retail investors, thanks to the reduced entry barrier and enhanced liquidity facilitated by SM REITs.
In conclusion, the introduction of the SM REITs framework represents a landmark development in India’s real estate market, poised to unleash a wave of innovation, growth, and investor opportunities in the coming years.
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